Turkey wants to switch to cutting interest rates after another interest rate break

(Bloomberg) — Turkey’s central bank is likely to hold its key interest rate for the eighth straight month this week, although policymakers could signal the start of an easing cycle as early as December.

The Monetary Policy Committee will leave the one-week repo rate unchanged at 50% on Thursday, according to all economists surveyed by Bloomberg. Still, policymakers are expected to soften their language in the statement accompanying the decision, suggesting a downward move could be imminent.

The policy outlook has been unclear in recent months due to higher-than-forecast inflation numbers in September and October. Many analysts expressed forecasts for a rate cut next year following the release of this data, having previously indicated this in November.

But despite appearing to commit to high interest rates at the last policy meeting, Central Bank Governor Fatih Karahan struck a different tone earlier this month, revising inflation forecasts for this year and beyond.

According to analysts at Deutsche Bank, including Ankit Jain, the changes suggest a “slightly less restrictive monetary policy stance.” The lender, which had predicted a rate cut in January, then changed its announcement to next month.

The last MPC meeting of the year is scheduled for December 26th.

Meanwhile, economists at Goldman Sachs Group Inc. and Morgan Stanley continue to expect the first rate cut not to come until January.

The annual inflation rate slowed to 48.6% in October, with the central bank estimating the level will fall to 44% by year-end. However, policymakers prefer to pay attention to seasonally adjusted monthly prices, and Bloomberg Economics sees a “significant decline” in this value in November. That could pave the way for cuts starting in December, said Bloomberg Turkish economist Selva Bahar Baziki.

With interest rates at 50%, companies are becoming increasingly impatient. The influential lobby group Musiad joined calls for a cut earlier this week, saying there should be a “symbolic” cut next month and complaining that the cost of doing business was too high.

Turkish President Recep Tayyip Erdogan, known for his aversion to high borrowing costs, also spoke about monetary policy after months of silence, giving the somewhat cryptic message that “both inflation and borrowing costs will fall.”

Erdogan has in the past pushed central bankers to cut interest rates – regardless of inflation – to stimulate economic growth, and has removed those who did not comply.

With debate looming over raising the minimum wage next year, more attention is being paid to complementary fiscal measures to reduce inflation. Karahan said price increases in certain sectors were due to factors over which monetary policy had little control.

Finance and Finance Minister Mehmet Simsek has acknowledged that further fiscal policy steps need to be taken.

Next year’s increase in the minimum wage, expected to be announced in December, will be crucial. Economists at Deutsche Bank say investors would consider a hike of about 25% reasonable and would be alarmed at more than 30%.

On Wednesday, Erdogan promised that wage increases will continue to be above inflation next year and that workers’ purchasing power will be preserved.

– With support from Joel Rinneby.

(Updates with President Erdogan’s comments on minimum wage increase.)

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